Building a Better Theory of Well-Being

No 742, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: What do social surveys of life cycle experience tell us about the determinants of subjective well-being? First, that the psychologists’ setpoint model is wrong. Life events in the nonpecuniary domain, such as marriage, divorce, and physical disability, have a lasting effect on well-being, and do not simply deflect the average person temporarily above or below a setpoint given by genetics and personality. Second, mainstream economists’ inference that in the pecuniary domain “more is better,” based on revealed preference theory, is wrong. An increase in income, and thus in the goods at one’s disposal, does not bring with it a lasting increase in well-being, because of the negative effect on utility of hedonic adaptation and social comparison. The utility anticipated ex ante from an increase in consumption turns out ex post to be less than expected, as one adapts to the new level of living, and as the living levels of others improve correspondingly. A better theory of well-being builds on the evidence that adaptation and social comparison affect utility more in pecuniary than nonpecuniary domains. The failure of individuals to anticipate that these influences disproportionately undermine utility in the pecuniary domain leads to an excessive allocation of time to pecuniary goals at the expense of nonpecuniary goals, such as family life and health, and reduces well-being. There is need to devise policies that will yield better-informed individual preferences, and thereby increase individual and societal subjective well-being.

Keywords: health; living level; subjective well-being; marital status; aspirations (search for similar items in EconPapers)
JEL-codes: D60 I10 I31 J12 Z13 (search for similar items in EconPapers)
Pages: 60 pages
Date: 2003-03
New Economics Papers: this item is included in nep-cbe, nep-lam and nep-ltv
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

Published - published in: Luigino Bruni and Pierluigi Porta (eds.), Economics and Happiness: Framing the Analysis, Oxford University Press, 2006

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